Friday, 25 April 2014

This might be like 1988 all over again...

From Wiki:

Mortgage interest relief at source, or MIRAS, was a scheme introduced in the United Kingdom by Chancellor of the Exchequer Roy Jenkins in 1969 in a bid to encourage home ownership; it allowed borrowers tax relief for interest payments on their mortgage.(1)

In the 1983 Budget Geoffrey Howe raised the tax allowance from £25,000 to £30,000. Unmarried couples with joint mortgages could pool their allowances to £60,000, a provision known as Multiple Mortgage Tax Relief.

This remained in place until the 1988 Budget, when Nigel Lawson ended the option to pool allowances from August 1988. Lawson later publicly expressed regret at not having implemented the change with effect from the time of the budget, as it is generally accepted that the rush to beat the deadline fuelled a sharp increase in house prices.(2, 3)

1) As we well know, the first really big post-war house price bubble was between 1970 and 1973, probably largely as a result of this subsidy, which duly popped.

The UK government then rushed to stoke inflation in order to mask the resulting house price declines. Back in the day the UK still had fairly strict currency controls, so they could do this quite easily and so nominal prices did not really go down at all.

2) So maybe part of the explanation for the recent meteoric rise in house prices, in London and the South East at least, was people rushing to beat the deadline before the new Mortgage Market Review came in:

From 26 April lenders will have to stress test borrowers' affordability to take into account the impact of expected future interest rate increases with reference to market expectations over the next five years...

Coreco director Andrew Montlake says: "Lenders are now stress testing against rates of around 7 per cent, so for those borrowers who do take lower fixes initially they are already being underwritten as being able to afford a higher rate when that expires in two years' time."

Crikey. Seven percent!

3) Getting rid of Domestic Rates and replacing it with the Poll Tax managed to maintain the price momentum for another year or so, but we all remember what happened to house prices after that double sugar rush had worn off - see chart from (1).


The Stigler said...

Interesting observation. It didn't seem to be as publicly raised as the dual MIRAS thing. I remember a few people I knew rushing to try and get a house together before MIRAS ended.

But it may be that estate agents got people walking through the door and said "better move quick as these rules are coming in" and got people thinking they could move.

DBC Reed said...

As regards 1) there were probably a lot of factors involved in 1973: the abolition of schedule A that taxed house price rises out of income and the pressure put on mortgage providers by middle-class feminists particularly in the posh Sunday papers to allow for the inclusion of women's incomes in mortgage calculations come to mind. I am pro-feminist but this campaign led to women getting dragged into mortgage slavery so that they could n't afford to have time off with the kids and consequently the rise of expensive child care.[I also have reservations (to put it mildly) about Suffragettes handing out white feathers in WW1 and supporting the war effort so indiscriminately.]

Graeme said...

DBCR, I thought owner-occupiers were removed from the scope of Schedule A in 1962. If so, then it doesn't seem to have had much of an effect on house prices.

Lola said...

The MMR has already totally screwed up the market. I was talking to a really sensible disabled client not a moment ago who on a semi self cert basis re-mortgaged to an IO deal until his age 85 (which he is odds on not to attain) that enabled him to stay in his very nice house which he partly lets out. Under the MMR this would not have been possible and he would have been forced to sell up.

The bloody thing is insane.

Graeme said...

The introduction of MIRAS might have taken place in 1969 but mortgage and other interest was already offsettable against income tax. What changed in 1969 was that other interest was disallowed. So it is not at all clear that the introduction of MIRAS was done to stoke the housing market.

"I therefore propose that, in future, bank interest, and interest on other comparable personal borrowing, shall not be allowed as a charge against tax.

§ There will be certain exceptions to this general rule. First, interest which is a proper business expense will continue to qualify for relief; this means that bodies liable to Corporation Tax will only be affected by the new provisions in special cases. Second, we shall exempt the owner-occupier who is buying his house, though I think the exception should go somewhat wider than house purchase. Relief will therefore continue for interest on money borrowed for the purchase or improvement of any land or buildings, whether owner-occupied or let, in the United Kingdom or in the Irish Republic. "

DBC Reed said...

I've got 1963 as the date of Schedule A abolition :the upswing started then, not very steep at first but then it would n't be.
As for the tax off-set on mortgage interest, I believe there was once a period when this was in place simultaneously with the levying of Schedule A .Rather contradictory.
Also there was a general cross-party understanding, that if homeownership was subsidised, some subsidy of council house rents was in order.
The Tories were quite clear they meant to be identified as the party of homeowners because in the early Sixties the Tory brand was nearly unsellable with MacMillan peddling a form of Conservatism well to the left of the present Labour Party.

Kj said...

DBC: actually schedule A imputed income taxation with makes sense from a symmetrical standpoint. As a business you get a deduction for interests to get an income, coupled with a tax on the income. When you impute income from homeownership and tax it, there is a similar argument for deducting the interest on the mortgage, and improvements, and maintenance. But then you'd also need to throw in cgt in the mix. Obviously the simple thing to do, which the UK did, was to ditch both the imputed income and deduction on interest, albeit at different times. Fair enough, but as history shows, it's not enough.

Mark Wadsworth said...

TS, here's hoping.

DBC, as G says, Sched A disappeared long before then.

L, sorry to hear that but it's all good from my point of view.

G, yes, I was hoping nobody would point out that up to then, you could claim for just about any interest :-)

The other thing of relevance is the "at source" bit, which makes life easier.

But all the same, it made housing more attractive as an 'investment' compared to other investments, and there must have been something which triggered the early 1970s bubble.

DBC, I refer you to Kj's explanation.

Kj said...

Corrections, was:
"schedule A imputed income taxation with mortgage interest deduction makes sense from a symmetrical standpoint." And
"it´s not enough to stop housing bubbles".

You could, in theory, in a very complicated system, create absolute neutrality as to assets, income, and the taxation thereof. But there would still be the tendency for land rent to swallow up economic growth, and cause bubbles, and so on.

DBC Reed said...

KJ It may be symmetrical (to have both subsidised interest rates AND Schedule A taxation) but that's only because its wrong at both ends.Why dish out cheap interest rates and only to collect the results later in tax?Why not miss out the cheap interest rates in the first place?
MW I do know the date of Schedule A abolition: I have given it above.
It came at the beginning of the inflationary gradient.The real problem came with the changing of mortgage regulations to allow couples to pay for mortgages jointly.This came about through a lot of short-sighted feminist rhetoric which has left women as mortgage slaves as well as slaves to men(Some hopes!)Now they have to go out to work AND do most of the housework child-caring.That's progress! Mrs Pankhurst, ever keen to see everybody buckle down to fulfil the national destiny, would have been very proud.Not so daughter Sylvia who saw through the whole political caper and her warmongering sister and mother.

Mark Wadsworth said...

DBC, Sch A taxation of owner-occupiers was abolished in Finance Act 1963, Part II, Chapter II, the relevant section says it applies to 1963-64 tax year onwards.

DBC Reed said...

So? I gave you this date.

Mark Wadsworth said...

DBC, yes, bit of a mix up, in your earlier comment you mentioned 1973, in a l8er comment you give the date as 1963.

Either way, who cares? It was 1963, we are agreed on that (it being correct) and I can't be bothered arguing who said what and why.

Kj said...

DBC: the net result, that is, how taxation affects a transaction, or disposition of assets, is exactly the same whether you do imputed rents + interest deduction, or abolish both, theoretically (ofcourse it will not be entirely symmetrical, since imputed rents will always be underasessed in practice). Ofcourse MIRAS and imputed rents taxation were entirely separate in time, so this has never been intentional UK policy.
But it was here in Noruega up until 2005, but they decided to skip the abolishing interest rate deductions bit.

DBC Reed said...

@KJ This is getting well confusing.
In practice the UK got rid of Schedule A in 1963 (as I said much earlier in No6 above) but carried on with MIRAS which was doubled in scope by the onset of two partner mortgages.Nigel Lawson, father of the more famous Nigella, made MIRAS per property not per person ,then Labour, I think Brown, abolished it completely calling it a "middle class perk." But abolishing schedule A on domestic housing was A VERY BAD THING which had been seen off previously by Enoch Powell.Better LVT. But not better: no tax at all.Si monumentum requiris, circumspice.(Latin as tribute to classicist Powell.)

Kj said...

Yes it was a bad thing. BAndjust having interest deductions is worse, having LVT is ofcourse better, there's no disagreement.